Lemnos LabsHardware Venture Fund2016-12-09T06:51:18Zhttp://lemnoslabs.com/feed/atom/WordPresshttp://lemnoslabs.com/wp-content/uploads/2016/01/cropped-logo-2-32x32.pngDave Merrillhttp://www.lemnoslabs.comhttp://lemnoslabs.com/?p=104172016-08-19T00:17:30Z2016-08-18T22:02:19ZA great business creates a virtual monopoly for a certain period of time. Usually this is not a true monopoly where the competition is prevented from selling their good or service – you’re not allowed to do that. But the most successful businesses create effective monopolies in their markets, by doing things and going places that make it very difficult for the competition to follow.

Doing something that’s hard for the competition to replicate doesn’t necessarily mean rocket-science-level hard technology. I use the metaphor of a “moat” to think about startup defensibility – it’s the barrier (possibly a low-tech one) that slows down the hordes when they decide to storm your castle, so you can keep making and selling your product profitably.

Hardware products have a key defensibility flaw: they can be taken apart and copied by your competition. In the past, the copies might not be as good as the original (e.g. HiPhone vs iPhone), but these days copies are sometimes even better! (e.g. Xiaomi camera vs GoPro) It might seem strange that it’s easy to copy hardware, since startup people usually think of hardware as being hard – but there are lots of companies in China that are extremely efficient and awesome at making perfect/improved duplicates of existing products.

The standard refrain these days about how to make a hardware product defensible is: It’s the software!

For a hardware company pursued by cheap clones, "run upstairs" = make the product consist of as much software as possible.

Is software actually a moat? First, let’s get specific about what this statement means. Although most hardware products have software/firmware running on the device, the software that matters for defensibility is more often a cloud service that connects to the hardware. It’s pretty easy for anyone determined enough to copy your on-device software, but the code in the cloud – proprietary algorithms, communications, unlimited compute and vast datasets – that is the defensible software.

So what are the ways to make a hardware startup defensible today? Here are a handful of strategies that I have seen play out in the market in recent years – I’d love to hear thoughts on other approaches that I’ve missed:

Build a brand. Win by dominating mindshare. GoPro did this successfully to beat competitors like Contour in the action camera space [1].

Build a community. (strongly related to building a Brand) MakerBot wasn’t the first, the cheapest, or even the best consumer 3D printer of its time. So why did Stratasys acquire it for north of $400M? Makerbot’s community-contributed cloud content platform Thingiverse was the #1 destination for 3D printing enthusiasts sharing their designs. This community, enabled by the platform, made the Makerbot experience unique in the market.

Be first to market. I believe that first-mover advantage in hardware is more important than in software. After all, Google was not the first search engine and Facebook was not the first social network. However, Dropcam was the first consumer-friendly WiFi security camera, and Fitbit was the first connected pedometer – these companies built category-defining products [2]. Lots of competitors followed Fitbit and Dropcam after these categories were defined, but none have achieved the same level of name recognition or sales.

Be (very) profitable. With high margins, you can spend more money than your competition to acquire new customers, and this can be a defensible advantage. Fitbit has always enjoyed great unit economics on their hardware, and a connected-hardware company like Square can achieve good overall economics via a blended hardware/software margin.

Sell your hardware as a service. Managed hosting companies like Rackspace and AWS have been selling hardware as a service for a long time. A new wave of robot-enabled businesses (e.g. Dishcraft Robotics) is now beginning to apply this model. There are numerous benefits of the hardware-as-a-service (HAAS)/robotics-as-a-service (RAAS) model:

The cost of the system doesn’t hit your customers’ capex, making the sale easier.

If the startup operates the hardware itself (e.g. managed hosting) the hardware doesn’t have to be perfect to begin selling the service, speeding time to market.

It may be possible to prevent your competitors from having a close look at the hardware (especially if the startup operates the hardware itself), making the protection of trade secrets feasible.

Go double-black diamond. Build something that is truly difficult to copy, via cutting-edge technology and/or high system complexity. This is more often doable by big companies, but can be in the domain of startups – for instance with a tech breakthrough transferred out of university research.

Collect proprietary data. This is not specific to hardware companies, but for startups building new applications atop machine learning, having a dataset that nobody else has can be a competitive advantage.

Clear regulatory hurdles. (related to the double-black diamond approach) The time and expense of gaining certain regulatory approvals – for instance FDA certification – is a barrier to entry for newcomers into a regulated market, so a company that has managed to gain regulatory clearance can put distance between themselves and the competition.

Network effects. A product with network effects gets more valuable to customers as the customer base grows in size. Facebook and telephones work this way. This is also a key aspect of Fitbit’s defensibility in the era of cheap/copycat activity trackers – since Fitbit customers can compete against their friends (but only if their friends own a Fitbit), there is an incentive to buy Fitbit.

Price/market the product in ways incumbents cannot. Sidestep the constraints that bind the entrenched incumbents. For instance: Honest Tea marketed its product as a healthier, less-sweet alternative to sugary iced teas in the market owned by Coke and Pepsi [3]. These large incumbents would have had to repudiate their own product lines to follow suit. Dollar Shave Club eschewed over-engineered and expensive razor-blades from P&G, offering a simpler and lower-cost option. P&G needed to maintain high margins on their blades to support their big investments in R&D, so they could not follow [4].

Scary / Taboo markets. Today this means domains like sexual & reproductive health, marijuana-tech. Uber was an example of this when it started – everyone said “you’d be crazy to take on the entrenched incumbents in the space – the taxi dispatch!” Paypal Many entrepreneurs and investors are too timid to enter these markets, leaving an exploitable competition vacuum to those who will. This defensibility won’t last very long though, as evidence of wins in these spaces will encourage others to jump in.

Ecosystem lock-in. Products with consumables (K-Cups for Keurig, eBooks for Kindle) or product lines having shared accessories (batteries for power tools, lenses for Nikon/Canon cameras) introduces a consumer lock-in dynamic due to the switching cost to the consumer. Once the customer has invested in the accessories or consumables, they are more likely to stick with the product line.

Keep secrets. Don’t announce till you are 4 weeks from ship. This is antithetical to the current Kickstarter method, but is a must in a world where customer attention is short (delays will kill you) and china is good (they will beat you to market if you give them >2 months notice). It’s more difficult to keep the details of how the product works post-launch, but possible if real secret sauce is software that runs in the cloud where its inner workings can be hidden behind an API call.

Win the ground game. Couple concepts here:

Have excellent customer service and support: This can differentiate a startup vs a larger incumbent. As Paul Graham put it: Tim Cook doesn’t send you a hand-written note after you buy a laptop. He can’t. But you can. That’s one advantage of being small: you can provide a level of service no big company can [5].

Regional expertise: Founders that understand their local culture well can create products that resonate with their regionally-based audience better than outsiders can. Facebook is dominant in the US, and Renren leads in China.

In closing: There are a bunch of approaches to making a hardware startup defensible. Not all of these ideas will apply to every company, consider this a sampler that lays out some of the most common approaches. The best defense is a good offense – make something great, something that your customers want to “grab out of your hands” as Steve Blank puts it, and keep moving fast. And remember that in most startups you win by endurance [6] – you’re in a marathon not a street fight.

]]>Eric Kleinhttp://lemnoslabs.com/?p=101332016-07-28T15:38:39Z2016-07-28T15:38:39ZOur portfolio company Compology was highlighted in a recent TechCrunch article about startups focused on waste management. While waste management isn’t a sexy topic, it is a huge market and a great opportunity for new solutions. Just the kind of business Lemnos Labs loves to invest in.

Congrats to Jason, Ben, and the whole Compology team on their great progress!

We created another hardware event after much thought. Asking CEOs and founders to leave their teams and customers for a day is a significant request. We wanted to honor that request with an event focused on deep connections and content. Less being talked at and more networking amongst hardware peers. Our event goals were:

An “off the record” event (no press) so people could openly talk with their peers about challenges, best practices, and lessons learned. The best lessons often involve scars…

Most attendees had to be veteran entrepreneurs and hardware community members. We wanted leader/practitioners who each day face the challenges of scaling a hardware company after NPI (new product introduction). Marc Barros runs an amazing series of events for aspiring hardware entrepreneurs, so we wanted to compliment his work with an event for folks a bit later into the hardware life cycle.

We wanted attendees to network with three new members of the hardware community they didn’t know before. I was personally excited by the attendee list as it included people I had always wanted to meet and learn the story of how they created their products and teams.

We wanted each attendee to learn three new best practices for leading a hardware company that they did not know before.

Our goal was to bring together hardware entrepreneurs who were a little deeper into their voyage; leaders who were scaling their companies after first product launches, whether consumer or enterprise. Shipping your first hardware product is hard, but it is not the top of the mountain, only the first base camp. Organization scaling, demand planning, financing options outside of venture capital, and success metrics were the topics of the day, with great fireside chats from experienced hardware leaders.

While we won’t dive into the event itself per the “off the record” rule, we will say it is not a singular event. We are hosting dinner series and focused events around segments like space, applied robotics, consumer, enterprise, and next generation manufacturing. Second Wave Hardware is part of our continuing experiment to facilitate thoughtful, valuable discussions amongst the hardware community on scaling our businesses and solving the unique challenges we face as hardware entrepreneurs. More detailed, honest discussions and networking with peers; less speakers talking to large audiences with little detail.

We’d love to have you join the discussion. These events are small(ish) to facilitate great discussions, but there will be plenty of them. Please reach out if you are interested in learning more.

-eric

and Second Wave Hardware will be back in 2017!

]]>Jeremy Conradhttp://www.lemnoslabs.comhttp://lemnoslabs.com/?p=92832016-06-01T19:40:37Z2016-06-02T16:30:04ZWe first invested in Airware in late 2012, when many people were still extremely skeptical of the potential of commercial drones. At the time, most drones were used exclusively for military applications; it was not yet clear how they would be adapted to civilian use. Jonathan and I knew each other from MIT and when he approached us about investing, it was clear to me that he had been thinking about drones for over a decade. He explained the advances that were being made and what they could be used for, but he felt there was a critical component missing: reliable autopilots and control systems.

Over time, the vision has evolved into making Airware the definitive platform for commercial drone systems.

Based on this insight, we went on to make 3 other drone-related investments: a component company [Vires] and two companies that don’t currently use drones but will greatly benefit from them when they are more fully deployed [Ceres and Enview]. Today we’re still looking for companies that want to use drones for new applications.

With the Series C, led by Next World Capital, Airware will be able to continue to build out the world’s best integrated system. In addition John Chambers, the former CEO of Cisco has invested in, and joined the board. His expertise in selling complex systems to F500 companies will be invaluable in helping Airware continue to grow.

—jeremy

]]>Jeremy Conradhttp://www.lemnoslabs.comhttp://lemnoslabs.com/?p=92092016-07-07T02:45:20Z2016-05-27T00:56:00ZFood technology is something we’ve been interested in at Lemnos since day one. We think that advances in the hardware that creates and interacts with food will continue to increase in quality and improve consumer satisfaction.

We made our investment in Scott and Shireen over 2.5 years ago. When they first pitched us it was immediately clear they possessed the two traits that many great founders have, a deep passion for their product and the knowledge that this is something the world needs. Going from that first bulky prototype to the pre-production units they have today has been a journey and we’re thrilled to have been part of it.

They recently closed a $9.2 million round led by Foundry Group and Brad Feld will be joining their board.

To date, they’ve been able to develop some great technology which focuses on the detection of incredibly small quantities of gluten in food. A few weeks ago, I was having brunch with Scott and got to see it in action. This round will let them continue to work towards a world where people are empowered to understand their food and make the right choices for their diet and their health.

]]>Dave Merrillhttp://www.lemnoslabs.comhttp://lemnoslabs.com/?p=89862016-05-18T19:23:38Z2016-05-18T19:23:38ZI am excited to share some great news! I am joining the team at Lemnos Labs as Entrepreneur In Residence (EIR).

As one of a small number of venture investors that are receptive to hardware deals, and of an even smaller set that ONLY back hardware, Lemnos Labs has been on my radar since its early days. I remember going over for dinner at Jeremy’s house a few years ago, soon after he and Helen raised the first fund. The group was made up of his friends, roommates, and founders of the first few Lemnos-backed companies. I quickly realized that everyone around the table was super talented and working on amazing projects and companies, each on a course to make their own dent in the universe. Knowing that today an even larger version of this community surrounds Lemnos Labs was one of the reasons I jumped at the opportunity to join.

Following almost a decade in user interface research at Stanford and MIT, I have been part of the hardware startup community for the past 7 years – first via my own company Sifteo that I spun out of the MIT Media Lab, then at 3D Robotics via acquisition where I helped build out the product group, ship a consumer-friendly drone and run R&D. I know firsthand that building great hardware companies is hard, and I am pumped to contribute to the ecosystem in my new role.

As EIR at Lemnos I have two goals: First, I’ll be spending part of my time alongside Eric helping the companies that Lemnos has already invested in, thinking with the founders about product, technology, team-building, fundraising, and go-to-market strategy questions that come up all the time in the life of a young company. Smart move (IMHO) for the partners at Lemnos to grow their team with people like me and Tim to help their portfolio companies succeed! Second, I am getting started on my own next project – stay tuned.

I can be found at Lemnos Labs in the Dogpatch neighborhood of San Francisco most days. You can find a little more about me here. If you have a hardware startup that you think Lemnos Labs should fund, or you’re doing robotics, AR, VR, cool stuff with sensors or human-computer-interaction – drop me a line: dave@lemnoslabs.com

Onward!

]]>Tim Skowronskihttp://www.lemnoslabs.comhttp://lemnoslabs.com/?p=88232016-05-13T22:58:07Z2016-05-13T22:54:12ZI joined (in spirit) Helen, Jeremy, and Eric at Lemnos years before I actually joined. Helen and I met on the soccer field. She was keeper on a team that my wife also played for. It was multiple seasons before we even talked about what we did when we weren’t playing soccer. It turns out we were both in hardware! I was at Mission Motors at the time and I asked to come see what she was up to with Lemnos. I immediately fell in love with that dirty old garage and the scrappy companies at the Forge. I would make frequent trips for design reviews, to chat about the state of hardware, and to flip burgers at the bbq’s. At one such bbq and during the burger flipping, I met Chris Bruce (founder of Sproutling). Chris and I had a great conversation on wearables and his company’s current state. Chris and I met often to discuss developing products and eventually he persuaded me to join Sproutling full time. After Sproutling was acquired by Mattel, I began to feel the pull to do what Jeremey referred to as “return to the nest” that is Lemnos. So I did.

As Director of Portfolio Development, I will be working with the companies at the New Forge to develop solid product development plans, and helping them to craft a path to a successful launch.

I couldn’t be more excited about joining Lemnos, about the role, and about the interactions will all of the creative and bright folks here.

Cheers to new adventures!

– Tim

]]>Eric Kleinhttp://lemnoslabs.com/?p=87662016-05-11T16:38:33Z2016-05-11T00:53:55ZThe success of Lemnos Labs startups is our singular focus. Success has many dimensions. Our companies require capital to scale and our first fifteen startups alone have successfully raised over $200M in venture capital. But capital alone does not equate to success. Our startups are powered by great people and knowledge more so than dollars.

Lemnos Labs itself is a small, focused team. We subscribe to the theory that you hire fewer of the best and aggressively over-achieve. It started with Helen and Jeremy. I joined a short time later, and last year Jennifer joined to hugely improve our internal Operations capabilities.

We’ve known for some time that we wanted someone with corporate and entrepreneurial experience who would significantly augment our manufacturing and logistics capabilities. We know that the right manufacturing, logistics, and operations partners vary for each of our startups. This means we need a tremendous amount of knowledge and expertise at Lemnos Labs about domestic and international manufacturing partners and best practices in an ever-changing environment.

We are excited to announce that Tim Skowronski has joined our team as Director of Portfolio Development. His experience at Intel, Apple, Mission Motors, Square, and most recently Sproutling (acquired by Mattel) will be invaluable in helping our startups before and during the ramp into full-scale manufacturing and logistics. Whether it is an enterprise startup building 1000 units a year or a consumer startup racing to ramp into 100K units, Tim has the experience and expertise to help them be successful in this critical growth phase. He also brings first-hand experience and passion about how startups transition from initial founding team to high-performance organizations.

Tim is going to teach us and our Lemnos Labs portfolio companies so many valuable lessons and techniques. Welcome aboard!

-ek

]]>Eric Kleinhttp://lemnoslabs.com/?p=70342016-02-13T00:41:18Z2016-02-12T16:08:57ZI had the opportunity to speak at ARM’s TechCon 2015, presenting a VC’s perspective on the Internet of Things (IoT). Highlights of that talk can be viewed here:

We believe the term Internet of Things (IoT) has become semantically overloaded. The press often refers to IoT as a single entity, yet each article ascribes vastly different characteristics and goals to IoT. At Lemnos, we monitor three distinct IoTs, with further subdivisions anticipated. Consumer, enterprise, and industrial each have a distinct IoT emerging around them, with separate stacks, requirements, and value chains. There are definitely elements in common between each, but saying that the same technology, partners, value propositions, and requirements exist for high voltage power lines, factory floor automation, and the pedometer on your wrist is quite a stretch.

I made the argument in this speech that we’ve reached a base camp of sorts for IoT, especially consumer IoT. Taking advantage of the commoditization of many sensors, we’re now highly if not over-saturated in certain product segments. From fitness to wearables, home automation and security, we’ve seen an explosion of products with similar feature sets and capabilities. CES 2016 could have been characterized as “The Attack of the Clones”.

We believe that the saturation of consumer IoT was inevitable, and the maturation of the market leads to consolidation. It will also herald the transition from instrumentation to behavioral modification. At Lemnos we love to say that we frown on applications for consumer IoT whose founding team lacks a clinical psychologist. It’s not enough to know you’ve on average walked 6543 steps per day over the last month. You bought a device to get into better shape, not to get a step count. The next generation of consumer IoT startups need to modify personal behavior and assimilate heterogeneous home gizmos into a simple and elegant solutions to more complex problems than simply turning on the lights when you get home.

To do this we’ll see amazing companies focusing both on vertical solutions and missing horizontal platform components. The IoT stack, regardless of consumer, enterprise, or industrial application, is still immature. Security, communication, semantic consistency, command and control are still far below what is needed for robust solutions. Entrepreneurs have opportunities to deliver build great companies improving the respective IoT platforms or creating customer value on top of these emerging platforms.

Lemnos Labs is almost more bullish on the enterprise and industrial IoT opportunities. Our investments in Ceres Imaging, Swift Navigation, Enview, and AquaCloud highlight our excitement about entrepreneurs solving problems in under-served but lucrative markets where instrumentation, analytics and reporting, and hardware-generated information to improve efficiency can unlock billion dollar opportunities. We might not have reached base camp #1 for enterprise and industrial applications, but many companies are pushing to get us there.

The full slides for the presentation are below, and we look forward to your thoughts and comments on what the opportunities around consumer, enterprise, and industrial IoT are!

-ek

]]>Eric Kleinhttp://lemnoslabs.com/?p=62832016-01-29T19:59:37Z2016-01-29T19:59:37ZOne of the most frequent questions we get is “Who does Lemnos Labs invest in? Do you incubate companies? Are you an venture fund investing in bigger hardware startups?”

The answer is yes.

Lemnos Labs is well known for funding small teams of entrepreneurs who’ve just started their hardware company. They have a functioning yet rough prototype, understand the basics of their market and economic value chain, and are ready to spent time in an intensive program to hone their technical, business, and go-to-market capabilities. These founders love the fact that Lemnos Labs startups also have an impressive ability to garner downstream VC funding.

We also have a program for single founders who are still ideating and searching for co-founders. Many of these founders haven’t even incorporated yet. We give them full access to the Lemnos program for a period, focused on helping them find the missing technical pieces, business plan modeling, and co-founders needed to launch a successful startup.

As an early stage hardware venture fund, we also invest in hardware teams who are farther along in their journey but still desire the proven benefits that Lemnos Labs offers hardware teams. These teams often have more employees, are farther along in their development cycle, but need help catalyzing complex business models, deploying complicated manufacturing and logistics chains, solving the technical problems associated with later stages of the development cycle, and raising significant venture capital along side other financing tools.

Lemnos Labs is uniquely positioned to be the first partner in your hardware startup and the smartest partner to join your efforts. No startup is too early for Lemnos and almost no startup is too late for Lemnos. We typically initially invest $250K to $500K in our startups and can invest up to $1M in the right opportunities. We’d love to hear about what you are working on!